CASE STUDY

The Case for All Day Breakfast

In evaluating the All Day Breakfast (ADB) proposal, management identified a key trend that helped drive decisions on its earlier successful initiatives and campaigns. The demographics of the world population in general, and the U.S. population in particular, are changing. The average age is rising while the number of young consumers (an historical McDonald's target market) is not growing as fast as the number of customers "graduating" from their McDonald's years. The company had targeted and positioned itself to serve this younger market in its product line, advertising, promotional activities, restaurant layout, and even its spokesperson, Ronald McDonald. As its customers aged and "graduated," the company needed to continuously develop a new base of young customers just to stay even. Developing new customers is always more expensive than retaining existing customers.

The Challenges

The challenges to a flawless ADB launch were considerable:

Uncertain Demand: The speed to market imperative of the ADB launch necessitated that the supply chain be prepared for any volume increase. A successful ADB launch would increase demand for McDonald's breakfast food items. But, by how much? Any significant increase could run up against supplier capacity constraints for some food items, constraints that would need to be addressed in advance. ADB had been tested in local markets earlier in the year to gauge its popularity. However, results from these test markets were not necessarily reliable indicators of actual demand on a national scale. If forecasts proved too optimistic, McDonald's suppliers and franchisees could be investing too heavily in inventories and the logistics to support this inventory. If the demand forecasts significantly under-estimated demand, the company risked stocking out of product and disappointing customers, an even greater misstep which would surely attract the attention of competitors, social media, and Wall Street.

Vulnerable Egg Supply: Highly pathogenic avian influenza (HPAI) H5 infections had been reported in U.S. domestic poultry in 15 states from December 2014 through June 2015. Infections within egg laying flocks were concentrated in the Midwestern states of Iowa, Nebraska, Minnesota, Wisconsin, and South Dakota. Nearly 42 million laying hens in these four states - 38% of the region's and 14% of the nation's laying flock - had been wiped out. The National Center for Disease Control was warning that H5 outbreaks in birds in the United States could recur in the fall and winter 2015. This highly contagious poultry disease generally requires quarantining production facilities and destroying infected flocks, therefore posing considerable risk to those dependent on a reliable egg supply.

As a result of the avian influenza outbreak, McDonald's egg supply chain had lost 46% of its suppliers' dedicated laying hens. Available shell egg capacity for McDonald's as of July 2015 was 83,000 cases per week. Its projected needs could be as high as 145,000 cases/week. Egg supplies nationwide were tight after 7 months of flock destruction and future supplies were uncertain. McDonald's animal welfare standards required additional steps and oversight before qualifying new producers, and meant that not all producer facilities could qualify, further adding to the complexity the supply chain faced before and during the launch of ADB. Constrained Hash Brown Capacity: Global manufacturing capacity for McDonald's specification of hash brown patties is limited. Three North American potato processors supply 100% of McDonald's U.S. hash browns and a significant percentage of its global hash brown requirements. The anticipated increase in hash brown demand resulting from ADB would push the limits of the approved suppliers' production capacity. Without proper coordination, it could also disrupt promotional activities beyond McDonald's U.S. market. In addition, oil quality plays a very important role in hash brown quality, and McDonald's and its suppliers used a unique zero-TFA oil blend.

Original English Muffin Capacity and Transition: McDonald's English muffin sourcing posed multiple challenges. First, production capacity among its suppliers was tight and not evenly distributed across regions. If sales reached the high-end forecast, McDonald's would not have adequate supplier capacity in the right place, so regional shortages were probable. Distribution was not homogeneous, as some fresh and frozen muffins were distributed via distribution centers and/or re-distribution hubs, while some bakers were close enough to their end users to distribute fresh using direct-store-delivery. This multi-modal, multi-level supply chain was not yet on-boarded to McDonald's supply chain integration platform which provided suppliers and McDonald's one shared view of demand. Lastly, the Company decided, nearly concurrent with the ADB decision, to transition from a newer formula containing a unique finely milled whole grain flour, back to the 100% unbleached flour in its English muffin recipe. To avoid confusion, it was important that the muffin transition in the restaurants be completed prior to the ADB launch.

Margarine to Butter Transition: In January 2015, McDonald's formalized its Food Vision and Product Road Map. This document drove the decision to convert from an easy-to-use liquid margarine to real butter. This decision would have significant consequences to suppliers and restaurant operations. Margarine and margarine suppliers would be phased out; butter would be phased in, butter suppliers added, and restaurant crews re-trained. ADB would greatly increase butter needs. In February 2015, just ten months prior to the ADB launch, McDonald's had only one active butter supplier.

Carrier Capacity Constraints: The transportation market was chronically very tight: trucking capacity was in high demand and short supply. Two transportation issues could potentially result in unacceptable inventory shortages: weather disruptions or sales exceeding forecast. If sufficient carrier capacity were not pre-negotiated, the excess loads would necessarily be tendered through the brokerage channel, an unreliable and costly alternative.

Equipment and Timing: Well before the launch decision was made, the equipment team faced a dilemma: how to meet the equipment requirements of each restaurant by the launch date when:

(a) the launch was not yet a certainty, and

(b) the needs of each restaurant were not known. The decision to launch - requiring support from both corporate senior leadership and franchisees would not be made until it was too late to meet the equipment requirements. The equipment team could not wait until decisions were finalized to begin its preparations, but making commitments to suppliers absent a firm decision exposed all parties to considerable risk. The dimensions of its dilemma were significant:

Manufacturing constraints: The proposed ADB national launch, if approved, would be launched almost concurrently with the Original English Muffin initiative. Together, these two initiatives would require additional toasters, egg cookers, and other equipment at each of the 13,700 domestic restaurants. Potentially, a restaurant could need up to 31 new equipment items, including small wares like spatulas and butter brushes. Fifty percent of the equipment would need to be ready for shipment in August. The approved manufacturing capacity for this specialized equipment was limited and insufficient. Some items needed in late August for restaurant training were manufactured in Asia. Given these constraints, equipment orders would need to be placed by June to provide time for manufacturing, transporting, delivering, and installing.

Uncertainty of Equipment Requirements: Prior to placing orders with manufacturers, a forecast of additional equipment requirements was needed. But McDonald's had never before launched a project like ADB under these time constraints, so no historical data for an equipment forecast was available. Equipment needs would vary by restaurant. ADB operating procedures were still in development in the limited test markets, so robust data and information did not yet exist to determine individual restaurant equipment needs. Only by surveying each of the 13,700 restaurants could an accurate forecast be produced. But to avoid unnecessary disruption to the restaurants, surveys would not be allowed until the probability of the launch was high, i.e. after the franchisee voting process began. This prolonged the already significant uncertainty on the true equipment needs.

Owner-Operator Approval Constraints: McDonald's independent owner-operators organize themselves into regional cooperatives and vote on nationally advertised campaigns. The Owner-Operator vote would occur from July 31 to August 31, 2015. Final results would not be known until September 1. Without approval for advertising ADB, there would be no initiative. This late approval process posed several challenges for the equipment team: (1) the dates were well beyond the June date equipment suppliers needed firm commitments to manufacture; (2) the process delayed the start of the restaurant survey, essential for determining individual restaurant equipment needs; (3) the final approval date was 12 days beyond the deadline to begin equipment distribution to the restaurants to meet Operations' timeline. As a result of these constraints, the team needed to complete its 13,700 surveys in less than three weeks: July 17 through August 3. It also burdened the equipment team with the additional risk of preparing shipments for nearly 50% of restaurants before the final endorsement by all parties on September 1, 2015.

Warehousing Requirements: Since large quantities of equipment would be manufactured and inventoried prior to the final decision to launch, warehouse space would be needed to store and efficiently consolidate loads for shipment. This space would need to be arranged prior to final approval of the initiative.

Shipping Constraints: Anticipating that, if ADB were approved, the team would be tasked with shipping to 13,700 restaurant locations in less than 30 days, the daily shipping capacity was determined to be insufficient. Additional transportation capacity would be needed.

Financial Exposure: The practical necessity of committing to equipment purchases prior to ADB approval posed a significant financial risk.

Questions:

Taking McDonald's as an example, discuss FIVE (5) reasons why a firm would attempt to actively manage their logistics and transportation needs. (25MARKS)